A study on the impact of economic freedom on economic growth in ASEAN countries BEH: www.beh.pradec.eu `Peer-reviewed and Open access journal BEH - Business and Economic Horizons ISSN: 1804-5006 | www.academicpublishingplatforms.com Volume 15 | Issue 3 | 2019 |pp.423-449 The primary version of the journal is the on-line version DOI: http://dx.doi.org/10.15208/beh.2019.24 A study on the impact of economic freedom on economic growth in ASEAN countries Dung Viet Tran Banking University Ho Chi Minh, Vietnam corresponding e-mail: dungtv[at]buh(dot)edu{d}vn address: Banking University, 36 Ton That Dam Street, District 1, Ho Chi Minh, Vietnam Abstract: We examine the impact of economic freedom on economic growth using data of ASEAN countries over the period of 2000-2017. To capture the characteristics of ASEAN liberalization purposes, we use different proxies documented in prior literature such as trade freedom, labor freedom and financial freedom as proxies of economic freedom. We document that higher economic freedom and higher labor freedom lead to higher economic growth. However, more trade freedom appears to inhibit economic growth in ASEAN countries. We find no significant relationship between financial freedom and economic growth. These findings survive robustness tests. JEL Classifications: O15, O17 Keywords: Economic freedom, labor freedom, trade freedom, financial freedom, economic growth Citation: Tran, D. V. (2019). A study on the impact of economic freedom on economic growth in ASEAN countries. Business and Economic Horizons, 15(3), 423-449. http://dx.doi.org/10.15208/beh.2019.24 1. Introduction Stimulating economic growth is central to any country’s economic policies. This is why the determinants of economic growth are widely investigated in the world by academics. Policymakers in ASEAN economies have switched their attention to policies that boost economic freedom as preparation for higher integration by 2020. ASEAN countries are in the process of achieving an integrated financial market. The integrated market is defined as the region where goods, services, investment, skilled labor and capital can freely move among ASEAN countries (Asian Development Bank, 2013). The main purpose of a comprehensive integration market is to boost economic development and reduce poverty Horizons Economic and Business and socio-economic disparities in the ASEAN region (Guerrero, 2010). This is because the increased capital flows, trading activities, and skilled labor are important factors of economic growth. Economic freedom boosts capital flows from trading and investment activities in the economy by removing financial obstacles and export and import tariffs (Wu, 2011). Economic freedom also leads to the higher movements of high-skilled workers, which improves the quality of human resources and hence stimulates economic growth (Keho, 2017). While these studies clearly point outs that positive effects of the higher economic freedom, some recent empirical studies show the negative side of economic freedom. The integrated market is associated with higher levels of economic freedom and financial liberalization, which might have a detrimental impact on economic growth. This is because the removal of financial protectionism in an integrated market can expose low- and low-middle income countries to higher volatility and economic shocks (Almekinders et al., 2015). Hatfield & Kosec (2013) argue that higher competition levels from foreign © 2019 Prague Development Center - 423 - A study on the impact of economic freedom on economic growth in ASEAN countries BEH: www.beh.pradec.eu enterprises can threaten the domestic manufacturing and financial market, which results in lower economic growth in developing countries. It is clear that previous studies show the inconsistent view of the implications of economic freedom on growth. Filling this literature gap is one of the main contributions of this study. Moreover, recent studies tend to focus on the effects of economic freedom on growth rate in worldwide economies (Hussain & Haque, 2016; Azman-Saini et al., 2010) or developed countries (Compton et al., 2011). The effects on ASEAN economic growth is less discussed. Therefore, this study aims to investigate the effects of economic freedom on growth in ASEAN economies. Economic freedom is, however, a general term. There is a range of factors that can be used to proxy economic freedom. They are called the Heritage economic freedom indices, and the dataset is provided by the Heritage Foundation/Wall Street Journal (HF/WSJ). This study uses the trade freedom, financial freedom, and labor freedom to proxy for economic freedom as they are appropriate to the aim of ASEAN countries in creating a region where goods, services, investment, and skilled labor can freely move among ASEAN countries (see Asian Development Bank, 2013). Guerrero (2010) point out that stronger capital flows, trading activities, and skilled labor movements are vital for ASEAN economic development in the integration market. In particular, following Miller et al. (2018), higher financial freedom is associated with more capital flows by removing financial obstacles. Trading freedom removes a number of tariffs and non-tariffs, leading to higher export and import activities. Labor freedom encourages the movements of high- skilled labor among ASEAN countries. Hussain & Haque (2016) also employ the indices of financial freedom, trade freedom, and labor freedom to proxy for economic freedom. This study follows Hussain & Haque (2016) to use financial freedom, trade freedom, and labor freedom to proxy for economic freedom because these freedom indicators are consistent with the general aims of ASEAN integration policies. The aim of this study is to examine economic freedom factors that are the most important to the ASEAN integration process. Therefore, economic freedom used in this study implies financial freedom, trade freedom, and labor freedom. Moreover, this study also includes an overall economic freedom index which covers twelve different indicators of economic freedom to capture the influence of the overall economic freedom to economic growth in ASEAN. However, this variable is not in the main focus of this study as it refers to a board range of economic freedom. While this study aims to examine the most important economic freedom factors that are expected to be highly influenced during the ASEAN integration process, namely financial freedom, trade freedom, and labor freedom. This study reports interesting findings on the relationship between economic freedom and economic growth. Firstly, this study finds a positive and statistically significant relationship between economic freedom and economic growth. This means that ASEAN countries with higher levels of economic freedom have higher economic growth. Secondly, this study finds that higher trade freedom appears to foster economic growth in ASEAN countries. Finally, this study reports robust evidence that more trade freedom inhibits economic growth. Financial freedom, however, exerts an insignificant influence on economic growth. The results of this study suggest that policymakers in ASEAN should further promote economic freedom and labor freedom to foster economic growth. Moreover, they should enhance the competitive power and efficiency of domestic firms to reduce the detrimental impacts of trade freedom on economic growth. The findings are valuable as ASEAN - 424 - © 2019 Prague Development Center A study on the impact of economic freedom on economic growth in ASEAN countries BEH: www.beh.pradec.eu countries are in the periods of liberalizing their economies to create an integrated market by 2020. The remainder of this study is organized as follows. Section 2 reviews the literature. Section 3 provides information about data and variables. Section 4 provides empirical models. Section 5 presents an analysis of data. Section 6 reports empirical findings and discussions. Conclusions are offered in Section 7. 2. Literature review This section reviews the previous findings on the relationship between economic freedom and economic growth. The definitions of economic freedom are also clarified to build a theoretical framework of economic freedom and growth. Based on the empirical findings, hypotheses are also provided to test the effects of economic freedom on economic growth. 2.1. Definition of economic freedom Economic theories are unable to provide a full picture of the determinants of economic growth. Smith (1776) was among the first who argue that economic freedom is a vital factor fostering economic development. Smith (1776) suggests that government support plays an important role in maintaining a well-functioning market. The idea has been a cornerstone of economic theory relating to economic freedom and growth. In recent decades, the concept of economic freedom has also been proposed as a condition and effective mean to stimulate economic growth (Borovic, 2014). As defined by Gwartney & Lawson (2003), economic freedom refers to people’s choice and freedom to decide their lives and the right to protect their property. Based on that, people can freely decide how to use their time, assets and talents. This is why Nikolaev & Bennett (2016) suggest that people tend to achieve more when people have more freedom to decide on their lives. Gwartney & Lawson (2003) suggest institutions and government policies are closely related to economic freedom because they directly provide protections to people's property and rights and allow people to do